Africa must unleash power of its financial markets

With Africa’s population expected to overtake China’s by 2025, the continent’s economic potential is undeniable.

At a time of slowing global growth, the world is starting to take notice of Africa’s fast-growing population and markets, and the opportunities they hold.

Between 2010 and 2016, more than 320 embassies were opened in Africa, while global investment is beginning to pour in.

A diligent approach can ensure that these opportunities are converted into profits and strong returns; but this is only half the challenge.

If Africa truly wants to become an economic powerhouse of the future, it needs to get serious about reforming its financial markets.

A broad, all-inclusive financial market that makes it easy for investors will enable Africa to grow. Fortunately, we can see large strides towards progress.

The recent ratification of the African Continental Free Trade agreement promises to create a single market with a combined GDP of US$2.5trn and access to 1.2bn people.

But more needs to be done by individual countries on the continent to reform and liberalise their diverse financial markets.

This will be the key to fostering financial inclusion, economic development and raising the capital needed to scale businesses and boost infrastructure.

Some countries like Botswana, Kenya, Nigeria and South Africa have made steady progress towards reforming their financial markets.

South Africa, home to Africa’s largest bourse, the Johannesburg Stock Exchange, took the top spot in both the 2017 and 2018 Absa Africa Financial Markets Index.

While the index highlights the progress and commitment made by African countries to reform their financial markets, there is still much to be done.

Countries such as Ethiopia and Mozambique lag behind Nigeria and Kenya’s heftier markets on the continent, particularly in the development of stock exchanges, which are essential to raising capital through listings.

Ethiopia lacks a securities exchange, while there are no equities listed on Angola’s exchange. Both Cameroon and Mozambique have a market capitalisation of less than 5% of GDP.

South Africa, the only country where the total value of listed equities is more than $100bn, at $1.1tn, is in a league of their own.

Only South Africa, Botswana, and Ghana have a market capitalisation greater than 100% of GDP, and it is lower than 50% in 14 other countries.

Accelerated reforms in Africa’s financial markets are needed, principally because they can help tackle the significant funding needs of the continent, particularly to bridge infrastructure and education gaps.

Such reforms can also serve as a catalyst for capital markets being positioned as platforms for efficient mobilisation of much needed funding to support growth of small and medium scale sectors, in a risk-reduced environment.

Hamstrung Markets

Africa’s transformation requires trillions of infrastructure dollars for roads, waters and electricity in the next twenty years.

For example, to achieve universal energy access by 2025, there is a need to raise up to US$55bn annually in domestic and international capital, while as much as US$50bn is needed to fund other infrastructure projects across the continent.

While some African countries are implementing policies to bolster regional stock market integration and encourage expansion, they are still hamstrung.

Low liquidity, lack of product diversity, excessive controls and administrative procedures in the foreign exchange markets, as well as, limited prospects for new listings are all significant obstacles to capital market integration and growth.

But it’s not all doom and gloom. For example, several countries have recently progressed in migrating to market-determined foreign exchange regimes, implementing local content policies, and creating more transparent and well-regulated capital markets, which have been supported by an improving tax environment.

This is vital for drawing foreign investment, encouraging domestic participation in capital markets, and aiding the development of the local capital markets.

Equally impressive is the increased financial inclusion through better design, implementation, and regulation of savings institutions. This has widened opportunities for people in these countries to access capital markets.

Progress has also been made through policies that have increased the size of assets held by local investors, creating opportunities to develop financial products and enhance market liquidity.

To accelerate financial markets reforms, African countries need to prioritise policy initiatives that make it easier for investors to participate in the markets.

For example, African countries need to pay more attention to the trading and settlement infrastructure in order to spur liquidity; while ensuring the timeliness and transparency of market data.

This will improve the competitiveness of Africa’s capital markets and better position Africa to attract its fair share of available global capital.

The fruits of opening up financial markets are undoubted. It is the main reason why GDP per head south of the Sahara sits two-fifths higher than it did in 2000.

And while much of the world retreats into protectionism, it is heartening to see Africa attempt to open up its markets. This approach must continue; starting with ambitious financial market structural reforms.

The continent has the power to transform not only its economic future, but also the lives of millions by leveraging on the power of the financial markets. It is an opportunity that Africa cannot afford to miss.

George Asante, the writer of this article, is head of markets at Absa Corporate and Investment Bank